Top trends for energy transition in 2021
The global energy transition is well underway. The energy industry has seen more change in the past five years than in the last five decades, and in the wake of Covid-19 the pace of that change looks set to accelerate.
Schroders estimates that approx. $120 trillion will need to be invested by 2050 to transform the world's energy supply, decarbonize other industries, and tackle climate change. The entire energy value chain, together with other sectors, will require decarbonization if the world has any possibility of hitting the climate goals.
Overall, Covid-19 has done nothing to slow the pace of change. On the contrary, it has concentrated minds amongst the business leaders, investor community, policymakers, and the public to take decisive action to address climate change. There is a general recognition amongst stakeholders that humans often struggle to understand the explosive nature of exponential growth – something that both the pandemic and climate change have in common – and both can potentially irreversibly disrupt our societies. So what are the key energy transition trends for 2021?
Green hydrogen is having its moment in the sun. Producing green hydrogen using renewable energy is getting increasing interest from policymakers and the industry. It is an attractive solution to decarbonize "hard to abate" sectors and as an "energy carrier".
BloombergNEF (BNEF) estimates that green hydrogen could cut up to 34% of global GHG emissions from fossil fuels and industry at a manageable cost if policies are put in place to help scale up the technology and drive down costs. BNEF estimates that the electrolyzer technology cost has fallen by 40% in the last five years and can fall further. Wood Mackenzie estimates that the overall costs could fall by as much as 64% by 2040.
The industry has also launched several green hydrogen projects with nearly 50 green hydrogen projects under development worldwide, according to The Institute of Energy Economics and Financial Analysis (IEEFA). BNEF estimates that there is over $90 billion worth of hydrogen projects in the pipeline.
The policy support for green hydrogen is increasing from several countries. The EU's hydrogen strategy envisages investment of up to €470 billion and 6GW of electrolyzers by 2024 and 40GW of green electrolyzers by 2030. Other countries with a hydrogen policy include Korea, Japan, China, Germany, Spain, and France. Hydrogen is also a vital element of the UK's recently announced ten-point plan for a Green Industrial Revolution. The UK aims for 5GW of low carbon hydrogen production capacity by 2030. Higher carbon prices (as is being currently planned) will also help shift the industry to green hydrogen.
The critical investment opportunities will be in electrolyzers and associated infrastructure, logistics, storage, transport and distribution infrastructure, and dedicated renewable energy projects.
Carbon, capture, utilization, and storage (CCUS)
The IEA's recent report confirms what is widely known - that net-zero climate targets will be impossible to reach without CCUS. Related technologies could remove CO2 from power generation and hard-to-electrify industries. CCUS is also a key mechanism to remove existing CO2 from the atmosphere at an industrial scale.
Successful deployment of CCUS depends on government action and the scale-up of reliable infrastructure that supports the transport and storage of CO2.
The pipeline of new CCUS projects has been growing, with nearly 30 announced since 2017, representing a potential investment of about $27 billion. This is in addition to several pilot and demonstration projects, technology test centers, and facilities using CO2. According to the Global CCS Institute, there are 51 large-scale CCS facilities globally, 23 under operation or construction.
This is based on new national and industrial net-zero and other climate targets, tax incentives, policy initiatives, the falling costs of the technology, and the emergence of new financially viable business models and improving technologies.
Strong government policy support, which is now increasingly forthcoming, will also help develop the shared CO2 transport and storage infrastructure. This is critical to support economies of scale, reduce costs, increase efficiencies, and reduce infrastructure duplication.
As part of the UK Government's 10 Point Plan for A Green Industrial Revolution, the Government has announced a target to capture 10 Mt tonnes of CO2 by 2030 and establish four carbon capture clusters with the first of these operating from the mid-2020s.
Offshore wind is having a banner year. BNEF's database suggests that it had its busiest 1H 2020 for final investment decisions totalling $35 billion, up 319% year-on-year and well above 2019's record full-year figure of $31.9 billion. This is based on the steep reduction in costs (down 67% of levelised expenses since 2012), improving the latest giant turbines' performance, and strong policy support from the governments.
The EU's Offshore Renewable Energy Strategy, part of the EU Green Deal, sets a target for 300GW of offshore wind by 2050. By 2030, the EU is planning to have 60GW of installed offshore wind capacity. To meet these targets, the EU Commission estimates that an investment of nearly €800 billion until 2050 will be required, involving investments in associated infrastructure such as supply chains and ports.
The EU's strategy also aims to develop commercial-scale floating wind projects, a technology that is also evolving and seeing significant improvements. Floating offshore wind projects will be critical in opening up new areas for development such as the Mediterranean, US West Coast, and Japan, to name a few.
The UK has also recently announced a £12 billion investment package for green energy designed to help the UK hit its net-zero targets by 2050 and has lifted its target for offshore wind to 40GW by 2030, including 1GW of innovative floating offshore wind.
BNEF predicts that wind and solar will make up 40% of the world's electricity in 2040. The intermittency of renewable energy creates complexity for the stability of the grid. Batteries are ideally placed to meet the need for flexibility in energy systems. A hybrid storage-backed renewables system could store excess energy during its generation hours and supply it to the grid at all times, thereby providing round-the-clock clean power to match the different demand levels during the day, leading to the displacement of thermal management and driving decarbonization of the energy system.
BNEF predicts that global energy storage projects will increase from 9GW in 2018 to 1,095GW by 2040. This will require $662 billion of investment.
Several key factors are driving this growth. BNEF confirms that battery prices have fallen 87% in real terms from 2010 to 2019 and is expected to fall to $61/kWh by 2030. The demand growth, new technologies, reduced manufacturing costs, standardised and simplified designs, and economies of scale drive down the cost of battery storage. There has been a steep increase in the quality, efficiency, performance, and reliability of battery storage systems, leading to their wider adoption in the grid.
Grid-scale lithium-ion batteries remain the dominant choice for now. Still, it is widely recognised that cheaper and longer-duration storage options will be required to support the energy transition. The UK green industrial revolution policy recognises this fact and has proposed establishing a £1 billion energy innovation fund to commercialise new low-carbon technologies.
Electric vehicles (EVs)
It has become clear that the next era of the automotive industry will be electric. The EVs are rapidly maturing with better performance, design, and safety. BNEF estimates that EVs' total market will expand dramatically from $95.4 billion in 2019 to $415.4 billion in 2025, with EV market share increasing from 2.4% of global new passenger vehicle sales to 12.2%. The key drivers for EVs' growth include improving technology, regulatory intervention, and ongoing investment into electrification.
Strong investor enthusiasm for electrification has led to soaring valuations in the EV space, with publicly traded companies such as Tesla Motors experiencing stratospheric gains.
Even without any government support, EVs were poised to reshape the automotive industry. Still, this trend is only expected to accelerate in light of further investments in the EV, batteries, and the EV charging space and the slew of EV models scheduled for launch in 2021.
A key plank of the UK's Green Industrial Revolution is its plan to end the sale of new conventional cars and vans by 2030. The EU is also considering implementing laws that would effectively amount to a 2025 ban on traditional vehicles due to higher emissions norms.
We anticipate further cost reductions, performance enhancements, and regulatory measures relating to the EVs in 2021 and beyond, including investments in the EV charging infrastructure and supply chain such as the 'Gigafactories.'
Climate tech investing focuses on technologies targeting the reduction of GHG emissions, addressing the impacts of climate change, or accelerating the transition to a sustainable economy.
According to a recent PwC report, climate tech investment has continued to rise and has seen a 3,750% increase from 2013 to 2019, with total venture funding increasing to $16.1 billion.
Climate tech funding sees investments from large technology companies that now have dedicated climate innovation funds such as Google, Microsoft, and Amazon and more traditional sources such as growth-stage investors, private equity, venture capital, Government, asset managers, and oil & gas supermajors and industrials.
The demand for climate tech is only going to accelerate, given the need for climate tech breakthroughs to transform industries and society.
Significant work is required in improving the use of digital technology at all levels of the energy system – from production and infrastructure to end-users. It is anticipated that 2021 will see further investments in digital energy systems to enables the industry to implement intelligent energy and power management solutions.
Sophisticated automation and analytics programs are required to manage an energy system based on diverse energy sources. Technologies such as AI, machine learning, IoT, automation, and blockchain are critical to analyzing and managing the overall system.
Renewable energy can better use the benefits that big data, advanced analytics, and other digital technologies can provide. For example, something as simple as sensors at solar and wind farms can provide better information on availability and optimise production and reduce unit costs.
Analytical insights will also help improve and retain customers and utilities to build better relationships with their customers.
2021 is set to be the beginning of a secular upward shift in renewable energy investments, together with technology improvements and cost reductions, all supported by strong legal and policy support from the governments and the public. The next decade will be critical in ensuring a successful energy transition and setting the planet on the path to hit the Paris Agreement climate targets.